Issue 1 - I was reading this article and I'm not sure if its my math that is out, the article's math (which i assume they lifted from the prospectus) or Prospa's math.
The 41 per cent average annual interest rate offered by Prospa has been set at a level to allow the SME lender to absorb a relatively high level of bad debts, funding costs and commissions while still delivering a reasonable margin to its shareholders.
So how does the interest rate flow through to the bottom line? The prospectus says an average Prospa loan, which has an original principal of $26,568 and a term of 11.7 months, would contribute $7200 of interest and other income. But it would also require Prospa to spend $4100, including providing for bad debts. This leaves $3100 of "loan contribution" flowing into the company.
So they are promoting the fact that their average interest rate is 41%, but then they provide the above example which on my math is an interest rate of circa 27% pa ish ????? Am i doing the math wrong or something? It just doesn't seem to add up.
Issue 2 - If this model of finance works, at what point do the banks move into it with far more efficient marketing channels? NAB already has an offering, which has varying degrees of success. So in the medium term if this product offering is successful a bigger, more efficient competitor with better access to your data (the basis for the analytics for calculating the risk matrix) will move into the space in droves. Everybody who has a business has a bank account, so at some point the customers will be targeted pretty quickly with offerings from the banks - especially the superior profile lower risk customers.
Now I do understand that the plan for Prospa is size, the bigger they are, the more efficient and the higher their margins, but that just doesn't seem like a big enough advantage to take on the Macquaries, CBA's, NAB's, Westpac's of the world, even BOQ could package up a lazy $100 Mil for this kind of product offering without even noticing it on the balance sheet - and they would still have a more competitive cost base than Prospa
PGL Price at posting:
$3.64 Sentiment: None Disclosure: Not Held
